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Conversion of Bonds for Aubrey Inc.

2. (Conversion of Bonds) Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1, 2004, at 98 plus accrued interest. The bonds were dated April 1, 2004, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2005, $1,500,000 of these bonds were converted into 30,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

a. Prepare the entry to record the interest expense at October 1, 2004. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)
b. Prepare the entry(ies) to record the conversion on April 1, 2005. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

Solution Preview

The par value of the bonds is 4,000,000. These have been issued at 98. So the issue amount is 4,000,000X98=392,000,000. The discount is 80,000. This is to be amortized over the rmeianing life of 118 months ( total life 120 months, 2 months elapsed). The amortization per month is 80,000/118=678.

The interest is paid semi annually. The interest amount for 2 months is 4,000,000X10%X2/12=66,667 - this is interest payable at the issue time ...

Solution Summary

The solution explains the use of the book value method to record the conversion of bonds into shares.